Trading GBP/USD before BoE Action

Cable touched a most recent low at 1.51060 on October 1st, a level not seen since May, and has since started trading higher. Last Friday saw a momentary rally after Non-Farm Payrolls were released much lower than expected. The price went from 1.5175 on release to touch 1.5236 within the preceding 30 minutes.

That momentum was short-lived and price has fallen to current levels below 1.5150. Although an interest rate hike in the US seems less likely any time soon sterling is suffering from its own weakness. Economic data from the UK has been showing an economy that seems to be slowing down.

Latest GDP annual growth rate is at 2.4% compared to 3.1% a year earlier. Manufacturing Production latest data for July turned negative at -0.5%, a year earlier the figure was at 3.5%. Inflation is currently at 0% and has been hovering around that level since the beginning of the year.

This Thursday a Bank of England policy meeting is scheduled. The previous meeting saw one member of the board vote in favor of an interest rate hike, and it would seem difficult to forecast that votes in favor may increase given recent unfavorable economic data.

However, should other members add their vote to a rate hike it would most likely cause this pair to rally on expectations that an actual interest rate hike may not be so far away. If you believe GBP/USD may increase in price over the next week then all you need to do is buy a Call option, which gives you the right to buy GBP/USD at a preset price (strike) for a specific date (expiry)

The monetary policy statement that will follow could also create some Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term as statements made may sway the market one way or the other. The market will be looking for indications on how the Bank of England sees the timing for interest rate hikes. Mike Carney has previously stated that interest rates would be increased by year end or early next year.

Statements that may put the likelihood of rate hikes on hold could see GBP/USD heading further south. In the case that you think this pair will trade lower over the next days then to take advantage of this possible move you can buy a Put option which gives you the right to sell GBP/USD at a certain strike for the expiry you choose.

Technical Look

Taking a look at the day chart price seems to be in a downtrend which may have hit a temporary bottom at 1.5106 on October 1st. That level could be the beginning of a retracement, the next resistance levels are at 1.52375, 1.53165 and 1.53813 on the respective Fibonacci lines.

Support levels are at its most recent low at 1.5106, followed by the previous lows at 1.50853 and 1.48545.

Trading with Options

Trade 1: If you expect the pair to trade above 1.5170 (current market price) and retrace higher, you may buy a Call option which gives you the right to buy GBP/USD at a certain price until a future date. For example, you may purchase a Call to buy 10,000 GBP at 1.517 over the next week. An image of this trade is below, you can see it would cost you a 60.40USD premium to buy this option.

If GBP/USD rises above 1.517 the option’s value will increase and, for example, if the price reaches 1.537 (200 pips higher) by expiry the option will payout 200 USD. But, if the price remains below current market price then the option will not payout and you lose the 60.40 USD premium paid.

Trade 2: If you expect the pair to trade down, you may buy a Put option which gives you the right to sell GBP/USD at a certain price until a future date. For example, you may buy a Put to sell 10,000 GBP at 1.517 (current market price) until October 13, 2015. An image of this trade is below, 1.517 is the 'strike price' and October 13th is the 'expiry date'. It would cost you a 59.42 USD premium to buy this option.

If GBP/USD falls below 1.517 the option’s value will increase and, for example, if the price reaches 1.497 (200 pips lower) by expiry the option will payout 200 USD. But, if the price remains above 1.517 then the option will not payout and you lose the 59.42 USD premium paid.